2. Accounting equation

Question 1

State the accounting equation.

Answer 1

Assets = Liabilities + Equity

Question 2

Define assets

Answer 2

Assets are resources owned by a business to generate revenue.

Question 3

Define liabilities

Answer 3

Liabilities are debts which business owes.

Question 4

Define equity

Answer 4

Equity refers to owner’s claim on business assets.

Question 5

What are non-current assets?

Answer 5

Long term resources which benefit the business current and future periods. e.g. delivery van

Question 6

What are current assets?

Answer 6

Short term resources which benefit business one year or less. e.g. inventory

Question 7

What are non-current liabilities?

Answer 7

Obligations which need to be repaid only after 12 months. e.g. 5 year loan

Question 8

What are current liabilities?

Answer 8

Obligations which need to be repaid within the next 12 months. e.g. trade payables

Question 9

State two reasons for equity to reduce.

Answer 9

1. business made a loss

2. drawings by owner

Question 10

When will equity increase?

Answer 10

1. business made a profit

2. owner contributes additional capital

Question 11

If Assets = $50 000; Liabilities = $23 000. What is capital?

Answer 11

Capital = Assets less Liabilities
= $50 000 - $23 000
= $27 000

Question 12

If Equity = $45 000 and Liabilities = $12 800, what is asset value?

Answer 12

Assets = Equity add Liabilities
= $45 000 + $12 800
= $57 800

Question 13

A business bought new office equipment on credit

$18 000. How will this affect the accounting equation?

Answer 13

Assets (equipment) increase $18 000
Liabilities (other payable) increase $18 000
Equity no effect

Question 14

A business bought inventory for cash, $400. How will this affect the accounting equation?

Answer 14

Assets (cash in hand reduce $400; inventory increase $400) no effect
Liabilities no effect
Equity no effect

Question 15

A business sold goods costing $450 for cash $600. How will this affect the accounting equation?

Answer 15

Assets (inventory reduce $450; cash in hand increase $600) increase $150.
Liabilities no effect
Equity (cost of sales reduce $450; sales revenue increase $600) increase $150

Question 16

Business paid rent expense $600 by cheque.

Answer 16

Assets (cash at bank) reduce $600.

Equity (rent expense) reduce $600

Question 17

Trade receivable paid by cheque $560 to settle debt of $600.

Answer 17

Assets (trade receivables reduce $600; cash at bank increase $560) reduce $40.
Liabilities no effect
Equity (discount allowed) reduce $40.

Question 18

How does income affect equity?

Answer 18

Income increases equity

Question 19

How does expense affect equity?

Answer 19

Expense reduces equity

Question 20

Paid trade payable $680 to settle debt of $720.

Answer 20

Assets (cash at bank) reduce $680
Liabilities (trade payable) reduce $720
Equity (discount received) increase $40

Question 21

Depreciate motor van by $3800

Answer 21

Assets (Motor vehicles net book value) reduce $3 800
Liabilities no effect
Equity (depreciation) reduces $3 800.

Question 22

Borrowed a loan of $5 000.

Answer 22

Assets (cash at bank) increase $5 000
Liabilities (long term borrowing) increase $5 000
Equity no effect

Question 23

Owner took inventory for own use, $610.

Answer 23

Assets (inventory) reduce $610
Liabilities no effect
Equity (drawings) reduce $610

Question 24

Owner paid for business equipment with personal cheque $4000

Answer 24

Assets (equipment) increase $4 000
Liabilities no effect
Equity (capital) increase $4 000

Question 25

Owner paid business rent, $2 000, with personal cheque.

Answer 25

Assets no effect
Liabilities no effect
Equity (rent expenses reduce $2000; capital increase $2000) no effect.